On Shorting

Playing Good Defense Leads To Good Offense

Disclaimer: Please note that this commentary reflects my personal opinion and is NOT investment advice.

Jim Chanos once said that the fraud cycle follows the business and financial cycle with a lag.

We’re undeniably towards the end of the current financial cycle. This is where the tide of easy money goes out and we’ll see the insolvencies and frauds coming out of the woodwork en masse.

The Fed:

Dan Greenhaus @DanGreenhaus

I feel like maybe this section of the @federalreserve #FOMC minutes should be getting more attention. It's pretty unusual to see this stated so plainly. @steveliesman @ScottWapnerCNBC @lisaabramowicz1

Leading indicator:

Lyn Alden @LynAldenContact

Us manufacturing PMI is now in a contraction.

The crypto ecosystem went out first. Next, perhaps the VC/PE world that’s been marking their investments to magic. In a sign of things to come, it turns out that Masayoshi Son personally owes $4.7bn to SoftBank (a nice read on this from the FT).

A lot of people got rich in a debt-fueled bubble where mindlessly ‘buying the dip’ has worked wonders. Now the biggest challenge is staying rich, or as Marc Faber likes to say, avoid losing money.

A big loss today will impact your ending wealth decades from now, just as if it happened decades from now (affecting a much higher wealth).

— Mark Spitznagel

That means being cognizant of where we are in the cycle and acting accordingly.

Ray Dalio on Shorting:

Keep in mind what part of the cycle we are in and keep an eye out for what comes next.

One of my investment principles that is very relevant now is "don’t always bet on up." 

Always betting on up, which is what almost everybody does, is both a mistake for investors and damaging to the economic system.

It's bad for investors because the downs are typically intolerably large and can persist for long periods of time, and it's bad for the economic system because it produces highly disruptive and unproductive big cycles.

If investments and policies were handled better, investors would be better off and the world would be a better place. In this post I hope to convey how and why. 

I suspect we’ll see much greater wealth destruction as higher interest rates filter through the economy. In such scenarios, shorting provides one way to preserve our portfolios and even make money during market plunges.

If you take care of the downside, the upside will take care of itself.

Shorting & Put Options — A Primer